After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now increasing. As an outcome, we can anticipate to see a boost in the number of REO residential or commercial properties offered on the market in the coming months.

Whether you're a relatively brand-new real estate agent or one who's remained in the organization for a while, you most likely could use a refresher on these bank-owned homes.
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Our resident REO expert, Jeff Underwood, shares what real estate agents require to understand about REO residential or commercial properties in Alabama.

What is an REO residential or commercial property?

Put simply, an REO residential or commercial property is real estate that is owned by a bank or lending institution after stopping working to cost a foreclosure auction. But to really comprehend REO residential or commercial properties, you initially need to comprehend the foreclosure process.

The Foreclosure Process

When a specific with a mortgage stops making payments on that mortgage for any factor, the foreclosure process will begin. The mortgage agreement will consist of language about when the bank can begin this procedure. Typically, a loan provider won't start the foreclosure process until the debtor has actually missed out on four consecutive payments.

Not all residential or commercial properties that get in the foreclosure procedure are actually foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, states, "In lots of cases, the mortgage is restored or the lending institution will work out loss mitigation choices to prevent foreclosure. A debtor who declares Chapter 13 personal bankruptcy will also stop the foreclosure procedure."

This procedure looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This indicates that the bank does not need to file a claim against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that informs the mortgagor that they are in default and supplies information about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require lending institutions to submit a claim against the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also published in the county newspaper for 3 weeks. If the bank or lender is the high-bidder or just buyer at the foreclosure sale, this residential or commercial property ends up being "property owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood states, "Lenders aren't in the service of keeping these residential or commercial properties. Their goal is to offer the home and recoup their losses from the foreclosure. After the foreclosure sale, the residential or commercial property will go on the market as an REO residential or commercial property." The lending institution sends out a recommendation for this residential or commercial property to both a genuine estate brokerage and a title business.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is very similar to noting any other residential or commercial property, with a few essential distinctions. There's still an indication in the lawn, a listing on the MLS, and pictures of the residential or commercial property. The broker's goal is to discover a purchaser for the residential or commercial property. But instead of a private customer, the broker represents a loan provider. On the MLS, this residential or commercial property will be designated as bank-owned.

Underwood says, "These residential or commercial properties might not look like a typical home that's market-ready. We had one REO residential or commercial property where the previous owner took whatever out of the home, including sinks and banisters. The bank will hire a company to tidy things up and make certain things are working, however buyers won't find a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for fair market price as rapidly as possible, so pricing is identified by acquiring a BPO, or broker cost opinion. Two real estate agents will offer their opinion on the marketplace cost of the residential or commercial property, and then these viewpoints are balanced to acquire the market price. If the residential or commercial property languishes on the marketplace, the bank will begin dropping the price in incremental portions to find a purchaser.

Title Process for REO residential or commercial properties

When the title business receives the recommendation for an REO residential or property, they will start a title search, simply as they would for any other residential or commercial property. "We do this before the residential or commercial property is listed for sale, and similar to any title search and test, we're searching for any potential problems so that we can provide a clear title to the purchaser," Underwood describes.

If the title is clear, this file is all set for when the residential or commercial property goes under agreement. If there are issues that need to be attended to such as judgments, encumbrances, or liens, the title company will clear the title so that it's all set for a future purchaser. Once the residential or commercial property goes under agreement, all that's needed is an update to title.

Common Title Issues with REO Properties

Several common title problems can emerge with REO residential or commercial properties. Tax redemption issues are particularly common. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they go through penalties and interest. If taxes are still overdue by April, the county will have a tax sale in May. For the most part, the county is the high bidder. But in other cases, a 3rd celebration will acquire the tax certificate.

Underwood states, "If the county owns the tax certificate, fixing this is a quite uncomplicated process. But if it's owned by a 3rd party, it can get made complex." To redeem from an individual, a bank is needed to pay the overdue taxes, charge, interest, as well as the value of any enhancements on the residential or commercial property. In some scenarios, there can be an extended settlement procedure to eliminate this tax lien.

Encroachment issues are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly delineated, which is why surveys are a needed part of the title search and test. Underwood explains, "An advancement is any structure that exists on a next-door neighbor's land or residential or commercial property - a fence, a shed, a mobile home, and even part of a house or barn." It can be complicated to clear these concerns and sometimes, a quitclaim deed might be needed.

And as with any other residential or commercial property, we can find any number of other title issues. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can likewise be discovered during the title search and test. Title companies experienced with REO residential or commercial properties know precisely which issues to try to find and how to resolve them to present REO buyers with a clear title.

Owner's title insurance safeguards homebuyers from covert risks to their title after purchase. A boosted owner's policy might be advised for people who purchase an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers need to constantly be mindful of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, deserve to redeem or redeem a foreclosed residential or commercial property for as much as a year after the foreclosure sale. Underwood describes, "To redeem a foreclosed residential or commercial property, the redeeming celebration should pay the quantity of the foreclosure quote, interest, and other charges including taxes, insurance, and repair work."

"Because foreclosure sales can occur reasonably rapidly in Alabama, the redemption duration is longer than in most states. For mortgages originated before 2016, that redemption period is a year. For mortgages come from after January 1, 2016, the redemption period is shortened to 180 days."

He continues, "Redemptions of foreclosed homes are extremely uncommon, but anybody buying an REO residential or commercial property requires to work with a lawyer who knows and understands the law." These laws vary from one state to another and can change, so always consult your closing lawyer with specific questions about the right of redemption.

Buyers purchasing an REO residential or commercial property before the redemption period ends requirement to be mindful that owner's title insurance will never ever supply affirmative coverage over the right of redemption. For money buyers, this will be noted as an exception in Schedule B-2 of the owner's title insurance coverage for the duration of the redemption period.

Lenders providing funding for REO purchases will typically need affirmative protection for the staying redemption duration. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure quote, but purchasers should understand that affirmative coverage for the staying redemption period only safeguards the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place until November 2021. As this moratorium has lifted, lending institutions have actually carried out loss mitigation treatments to keep individuals in their mortgages and help them keep their residential or commercial properties. However, if loss mitigation methods are unsuccessful, the foreclosure procedure starts.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see an increase in these as the year advances. Starting in the 3rd quarter of this year, we'll begin to see a higher-than-normal portion of REO residential or commercial properties on the marketplace. It won't be like it remained in 2008, but it will definitely be more than what we're utilized to seeing."

There's no requirement for real estate agents to be daunted by REO residential or commercial properties. As more of these residential or commercial properties appear in the MLS, real estate agents who understand the nuance of purchasing a bank-owned home are better geared up to serve their clients.

At South Oak Title and Closing, we love partnering with real estate agents to help them better serve their clients. Whether you have specific questions about working with REO residential or commercial properties or just need an REO expert in your corner, we're here for you. Contact us with your questions today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has actually invested decades dealing with banks, lenders, and REO residential or commercial properties through his time leading the REO division at a Birmingham law practice. Jeff is married and has two children: one recent graduate and one present student at Auburn University.

Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This article is meant to supply basic info about REO residential or commercial properties in Alabama and must not be considered legal guidance. Laws concerning REO residential or commercial properties likewise vary from one state to another. Please consult your local attorney with concerns.